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ACCA Strategic Professional · Advanced Financial Management · International investment and financing decisions

Which of the following is a recognised reason why the adjusted present value (APV) method is often preferred for appraising a foreign project financed partly by a subsidised loan from the host government?

APV discounts the project's operating cash flows at the ungeared cost of equity and then adds the present value of financing side effects, such as the benefit of a subsidised loan and tax shields. This makes it well suited to foreign projects with special, project-specific financing.

  1. AAPV removes the need to forecast any cash flows
  2. BAPV values the project at the ungeared cost of equity and then adds the present value of financing side effects such as the interest subsidyCorrect
  3. CAPV uses the weighted average cost of capital adjusted for the subsidy
  4. DAPV ignores tax shield effects to simplify the analysis

Explanation

APV separates the base-case NPV (discounted at the ungeared cost of equity) from financing side effects such as subsidised loan benefits and tax shields. This suits projects with special financing. Options C and D describe WACC use or ignoring tax shields, which are not features of APV.

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